Sunday, December 7, 2003

LaSalle bets on rebound

A Chicago-based lender has quietly carved a tidy niche in the Cincinnati area's commercial real estate market

By Jeff McKinney
The Cincinnati Enquirer

[IMAGE] Jenni Roudebush (left), senior vice president with LaSalle Bank, and John Wendt, with Ackermann Group, stand above the ongoing construction that will become the Cornerstone at Norwood development.
(Craig Ruttle photo)
When Cincinnati developer Steve Bloomfield needed $7.5 million to convert the blighted Ford factory in Walnut Hills into office space, some of the area's largest banks were less than eager to lend the cash he needed.

They might have been more receptive if Bloomfield and his backers had pre-leased 60 percent of the building along Interstate 71 before approaching them for financing in 2002.

With the economy lagging at the time and the vacancy rate for office buildings outside downtown Cincinnati at its highest level in more than 10 years, Bloomfield knew lining up tenants in advance would be difficult.

But LaSalle Bank, a Chicago-based bank that quietly entered Cincinnati's real-estate lending market about 16 months ago, came to Bloomfield's rescue, providing $7.5 million in a seven-year deal that allowed him to secure a historic tax credit to finish the $10.5 million renovation of the Ford factory.

LaSalle has been able to grab a sizeable bite of Cincinnati's commercial real-estate market - during a time when many proposed office buildings are not being financed - by doing deals other big banks don't appear to want to gamble on or perceive as too risky, local developers says.

For instance, Bloomfield said LaSalle put some assets in an escrow account to cover cash-flow shortfalls until his property reaches a certain occupancy rate, something other lenders would not consider. He said LaSalle required that his building have a 33 percent pre-lease rate, versus the 60 percent most other banks wanted.

"They're willing to structure deals that protect their risks and still make them palatable for developers," Bloomfield said.

Since August 2002, LaSalle has invested $195 million to finance some of the largest highest-profile commercial real estate projects in Greater Cincinnati, including:

• Investing $25 million to help finance the $28 million Cornerstone at Norwood office building/parking garage at Smith Edwards Road and Interstate 71.

• Putting up $13.7 million to finance the $18 million Union Business Centre office/warehouse buildings in West Chester.

John Wendt, a partner at the Ackermann Group in Eastgate, developer of Cornerstone at Norwood, said LaSalle reduced the amount of equity his firm had to contribute to the project, saving it millions of dollars that it can invest in other projects locally.

But could LaSalle, with a $13.5 billion commercial real-estate loan portfolio nationally, be taking on too much too fast locally?

Some observers say possibly so, particularly if interest rates rise.

But others say LaSalle is using creative financing to get some deals done. They also say LaSalle, like other banks, has made it tougher for developers to get financing by tightening credit standards, reducing its risk for problem loans.

Jenni Roudebush, senior vice president of commercial real estate for LaSalle in Cincinnati, acknowledges there are risks on any real-estate transaction. But she said LaSalle is comfortable with the deals it's done because the bank has structured the loans to mitigate risk and believes in its developers.

She also said LaSalle has turned down about $500 million in loan requests this year, many in Greater Cincinnati, because the bank was uncomfortable with the risk.

"We don't go in and out of the market during up-and-down cycles in the economy because there are always good deals being done and we understand real estate," Roudebush said. "In that sense, perhaps we are contrarians, but it sure has given us in Cincinnati the chance to be recognized for what we can do."

Bill Schneller, vice president of the commercial real-estate firm CB Richard Ellis downtown, said LaSalle has aggressively come into town and won business by being willing to finance new office developments with higher commercial vacancy rates.

He said LaSalle is taking a risk considering that the vacancy rate for Greater Cincinnati's suburban office building market is now roughly about 19 percent, the highest level since the early 1990s.

Schneller said LaSalle is gambling the office-building market will recover through 2005, when most of its projects will be completed.

But he also said the bank is financing some projects at very desirable locations. He pointed to the Cornerstone at Norwood project, one of the area's most prolific new developments.

Schneller said only time will tell whether LaSalle's gamble will pay off.

"If the office market recovers and all of the projects fill up, than the gamble will be very successful," he said. "If the office buildings don't fill up, they might have to take back some of these properties to help cover their investment."

Fred Cummings of McDonald Investments in Cleveland said regional banks have expanded in commercial real-estate lending in recent years despite the weak U.S. economy.

The reason: Record-low interest rates have made it easier for developers to make loan payments and spend less money to cover problem real-estate loans.

But he said some of the Tristate's largest banks, such as Fifth Third, U.S. Bank and Provident, might have cut back recently because of the local vacancy rate. "Those guys might believe there is enough demand to support the properties, possibly causing them to back off."

Local developers say that also might have been a crack LaSalle needed to become a player in this market.


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